Understanding Debt

http://www.nytimes.com/2015/02/09/opinion/paul-krugman-nobody-understands-debt.html

by mxfh • 11 years ago

57 97 11 years ago

nytimes.com

innguest7• 11 years ago

FTFA:

the world economy as a whole owes money to itself.
debt is money we owe to ourselves

Why don't we just collectively forget/forgive our debts, then?

Folks, if you think this astrologist/alchemist Krugman is doing scientific work in Economics, please stop and think: can you come up with a falsifiable statement for Keynesian Economics? I can come up with several for Evolution, which is why Evolution is a Science.

jhulla5• 11 years ago

Krugman's argument fails to see the massive misallocation of capital worldwide and the resulting instability and wealth distortion.

Just like he didn't see the 2008-2009 crisis, his models cannot see the current distortions and where they mar or may not lead.

TheOtherHobbes• 11 years ago

In fact Krugman, with his vile Keynesian bias, has been one of the few economists to make the correct calls in the Euro-debacle.

His record on other topics is significantly better than that of most 'economic experts.'

And he has at least one more econo-Nobel than (I'm guessing) you do.

He's been saying for a long time now that austerity is self-defeating. And he is, by any sane evidence-based standard, utterly right.

So your ad hominems are entirely off-point.

Meanwhile the neo-liberal school has made any number of claims that are often repeated even after they've been falsified by fact.

Laffer Curve? Boom. Dead. Utter rubbish. Totally falsified.

http://www.brookings.edu/~/media/Projects/BPEA/Fall%201999/1...

Trickle down? Self-serving nonsense. No evidence for it at all.

http://www.businessinsider.com/study-tax-cuts-dont-lead-to-g...

Don't tax corporations so they can create jobs? Boom. Dead. Corporations mostly just give the money to executives and hoard the rest.

See above, among others.

Don't allow governments to spend tax money on infrastructure, innovation, and public education? Excellent! You've strangled the research that led to the beginnings of the Internet, and one or two other important projects too.

And so on.

The truth here is that facts are not on your side. Name-calling is a poor substitute for being evidence-based, intelligent, and scientifically informed.

jhulla5• 11 years ago

Krugman did not foresee the 2008-2009 financial crisis.

If anything, bubble economics is his forte.

See here: http://www.businessinsider.com/krugman-in-02-greenspan-needs...

shit_parade2• 11 years ago

Thanks for the argument from authority, it is really adding to this discussion.

crazy1van4• 11 years ago

Laffer Curve? Boom. Dead. Utter rubbish. Totally falsified.

It may not be perfect, but to say utter rubbish is ridiculous. At its core, the Laffer Curve claims tax revenue is elastic with respect to tax rates. In other words, the revenue derived from taxes is not always proportionate to the tax rate.

The classic curve shows 0 revenue at a 0% tax rate -- obviously true since 0% times any number is 0 -- and 0 revenue at 100% tax rate -- because why would anyone work if 100% of it would be taken in taxes. Therefore, there exists a tax rate that provides the maximum amount of revenue between 0% and 100%.

The exact shape of the curve is wildly debated and some claim revenue doesn't truly drop to 0 at a 100% tax rate, but those don't change the point that it is possible to lower tax rates and receive more tax revenue.

derriz• 11 years ago

Erm no. He did not "call" the Euro crisis. I notice he has stopped mentioning Ireland, for example, because it now represents a counter-example to his world view. After a few years of austerity, growth has returned, unemployment is falling and tax revenues are rising in Ireland. All apparently impossible according to Krugman and in fact he explicitly predicted the opposite outcome would result from government policy. He irritates me highly because he is clearly smart but hasn't the tiniest crumb of intellectual honesty - he simply ignores inconvenient facts where other commentators and ecomomists (of various ideological bents) engage with difficult facts in order to explore and refine their own belief systems. I have gone from being a Krugman admirer to considering the guy a lying charleton in the space of 5 years.

Agustus• 11 years ago

Thus the problem with economics, statistics can be moved to support any side.

Correct calls in the Euro-debacle, what calls?

Appeals to an authority that selected an individual who did nothing more than present a slideshow or be elected President of the United States are not empirical examples from which to denigrate others. Also, Mr. Krugman has an economic text-book when he was a professor showing the downsides of minimum wage in an economic system, but later on, when writing for the New York Times disregards a number of his propositions. His articles in the New Yorks times are reviewed and inflated for incendiary material by his wife.

"...austerity is self-defeating, sane evidence-based standard..."

Assuming you are referring to Greece, the country is over leveraged in debt obligations, it readily admits they only have a few weeks of cash on hand (granted this may be a negotiating tactic), any move to try and reign in any of the million programs within the country was defeated. There was no austerity, just an appearance of austerity.

Assuming you are referring to the U.S. of A., the country's austerity measures are being seen as effecting economic recovery in a positive manner.

Your pointing to the Brookings Institute's report from Austen Goolsbee, he is a gun-for-hire economist to match whatever political whim that is needed. He served within the current administration and along with Christina Romer, sold their economic literacy souls to pass the stimulus. Which, you can point to as having worked, pushing unemployment down, but do not; real full-time unemployment has cratered.

Your Business Insider article admits that there is no correlation between trickle down, but also no demonstrable correlation with tax increases; all things being equal, policy should be for the populace to keep their monies.

"Corporations mostly just give the money to executives and hoard the rest."

Corporations do not hoard money unless there are financial incentives, corporate tax rates on bring money back to America means that many companies are investing abroad or simply placing it in off-shore accounts. If there is an activist shareholder on the board, they will lobby significantly to get a dividend, as Apple has done, or move to break up the company into profitable and unprofitable sections, as HP and its printing division keeps trying to get lopped off. The executives go out and try to make more money by investing it into return projects, look at Silicon Valley, the rich there take their earnings, set up an angel fund and then fund the next big thing. An economy does not end when the executive takes their money home.

"Don't allow governments to spend tax money on infrastructure, innovation, and public education? Excellent! You've strangled the research that led to the beginnings of the Internet..."

The Internet sprang up from a DARPA intiative through the Department of Defense to mitigate issues from a nuclear fall out through distributive services (http://www.internetsociety.org/internet/what-internet/histor...). The take-off of the internet that we know today occurred through private investments.

Innovation within in the government is minimal to non-existent, the government engages in rent-seeking habits that create projects that appear to innovate, but simply funnel taxes from the government to well connected "innovators" who fail quickly.

Public education should not be included in this as that is a state matter, not a federal policy matter; but public education could be accomplished better for students from a private side approach. Change could actually occur and administrators would be able to adjust curriculum faster.

innguest7• 11 years ago

If you asked me for proof that Evolution is scientific (and true) I'd point you to some (yet-unfalsified) falsifiable statements in Evolution: http://en.wikipedia.org/wiki/Objections_to_evolution#Unfalsi...

Please point me to some (yet-unfalsified) falsifiable statements in Mainstream Economics.

Thank you.

hnnewguy13• 11 years ago

Why don't we just collectively forget/forgive our debts, then?

I know, right? I mean, why don't I just throw these BofA bonds I own, paying 6.5% annually, into the trash because I don't like money. In the meantime, why doesn't Ford just give me the car I financed?

Folks, if you think this astrologist/alchemist Krugman is doing scientific work in Economics, please stop and think

Don't project your financial ignorance on other people, just because you don't understand how a balance sheet works. Someone's debt is another's asset; someone's income is another's expense.

His politics aside, Krugman is right in pointing out a fallacy that I see over and over again in the mainstream. That is, looking at only one side of the sheet. For example, the US households have so much debt! Well, guess how much value they have in assets?

msandford7• 11 years ago

For example, the US households have so much debt! Well, guess how much value they have in assets?

After the housing bubble collapse? Many of them have fewer assets than debt leading to bankruptcy. Assets aren't required to go up along with debt as a law of nature. Some people do a good job of buying undervalued things, other don't.

innguest7• 11 years ago

Value is in the eye of the beholder (or potential buyer).

I see you cut my quote halfway so you didn't have to present a case that mainstream economics is scientific, which I'm yet to see.

Please show some yet-unfalsified falsifiable statements in mainstream Economics so that it can be shown that it is scientific and true. Don't give me a run around with lots of words and no proof.

m52go6• 11 years ago

but the situation is not improved if efforts to reduce debt end up pushing the economy into deflation and depression.

I don't like how mainstream economists tend to portray deflation: that it's a terrible thing that necessarily leads to depression. I mean, is the average man on the street going have more money to spend if the stuff he needs (food, energy, etc) costs 5% more than it did last year? I'm not saying deflation is always a good thing, but particularly in times of declining incomes, I find it hard to believe it's the scary monster mainstream economists make it out to be.

And I particularly don't like how Krugman is always so quick to defend large debt loads. He keeps advocating to borrow borrow borrow, with seemingly no restraint. Is that really sustainable?

America has actually been borrowing less from abroad since 2008 than it did before

Ya, because we're printing the rest. That is NOT a good thing.

But of course, Krugman won't say that, or consequences that result from such policies.

yequalsx4• 11 years ago

The government isn't "printing money" in the sense that this phrase commonly denotes. The government is selling Treasury securities on the open market. The rate of interest right now is quite low and has been for the past 7 years. Krugman isn't advocating a belief that all debt all the time is a good thing. He's advocating a belief that in the current situation debt is not the primary concern right now.

Deflation is a bad thing for borrowers. It's a good thing for people who have no loans. I think the idea is that deflation is bad for the country because it's bad for banks and large multi-national companies. It would squeeze consumers who have mortgages and credit card debt and student loan debt. Thus this would contract the economy. As I understand these things. I'm not an economist.

jhulla5• 11 years ago

You forgot QE1, QE2, twist, and QE3 where the Fed digitally created $4 trillion and bought up assets.

That $4T didn't exist until the Fed conjured it up. Through a middleman, it was handed to the US Treasury.

nostromo4• 11 years ago

The government is selling Treasury securities on the open market...

And the Federal Reserve is buying a lot of those treasury securities with printed money.

m52go6• 11 years ago

The government is selling Treasury securities on the open market.

Right, which the Fed is then buying with the money being printed. Government debt is being monetized by the Fed however you slice it.

Deflation is a bad thing for borrowers.

I understand what you're saying, and in theory, it's true. Practically, it's flawed. Why? Because when I'm on a fixed income, I don't care about the value of my money that's going toward paying down debts. I care about the value of the money I have left over.

Say I earn $1000 a month. $600 goes to loans. $400 is left over to spend on food. With deflation, sure, that $600 is really worth more than otherwise. But it's a sunk cost to me. That $400 is what matters to me, as a consumer, and with deflation, it buys me more food!

Retric2• 11 years ago

Consider how traumatic the recent housing crash was for the man on the street.

The payment was unchanged, but there was a massive loss of flexibility as people could not sell under water houses.

Now expand that to the rest of the economy while lot's of leveraged companies and investments fail.

nine_k• 11 years ago

Isn't it because the prices of the houses were highly inflated, due to very easy credit?

Do you think that the rest of the economy is a bubble like the 2008 housing bubble?

uwe_dushan• 11 years ago

I've been trying to wrap my head around this myself as it does seem pretty counter intuitive (based on personal experience - 5% change in prices over the course of a year in either direction has no impact on my purchasing decisions).

I think the key issue is that deflation makes borrowing a really bad idea (as each year you effectively owe 5% more) and much of our economy depends on consumer debt (cars, housing, college degrees) but I'm willing to accept that a programmer's mind isn't well suited for grokking economics.

frandroid• 11 years ago

And I particularly don't like how Krugman is always so quick to defend large debt loads. He keeps advocating to borrow borrow borrow, with seemingly no restraint. Is that really sustainable?

As long as the interest remains smaller than inflation, yes.

hnnewguy13• 11 years ago

I find it hard to believe it's the scary monster mainstream economists make it out to be.

It isn't really complicated. First, when the value of holding cash gives a positive return, then it changes investment allocations. People often argue that "I won't change my spending habits!" Well, if you were economically rational, you would. But let's be realistic, no one cares about you putting off buying a TV. The concern is for the global financial system as a whole, who suddenly have incentive to hold money rather than circulate it.

Second, incomes are part of the deflation equation. It's one thing when technological progress allows for manufacturing processes to make items cheaper and we get cheaper computers. It's another when massive price deflation (ie oil) causes a sharp decrease in wages and mass unemployment.

Third, debtors are harmed during deflation, as the absolute value of their debts increases. That means your average household gets into trouble.

That is NOT a good thing.

Prove it. Seriously. If you can, I'm sure you've got a Nobel in your future. I'm not being facetious. Nobody really knows how this ends, good or bad.

Unfortunately, Economics can't run experiments. You apply theory, make a best guess, implement the policy, and hope for the best.

m52go6• 11 years ago

Everything you said is true, but I don't find the points terribly practical.

1) I seriously doubt investors will prefer to hold US dollars for meager deflation gains instead of investing in other financial assets projecting far greater return (stocks, bonds, real estate, etc).

2) Wages are sticky. Yes, 20 years of deflation would send wages down. I don't think a short period of deflation would do too much.

3) See my comment below. I printed an abridged version of it here:

When I'm on a fixed income, I don't care much about the value of my money that's going toward paying down debts. I care about the value of the money I have left over.

I appreciate your points, but I still think deflation fears are overblown.

------------------

EDIT: to comment on your last remark about proving the unfavorable effects of money-printing...I don't need to run tests. I have history. Money printing is the genesis of hyperinflation, a well-documented historical phenomenon.

http://en.wikipedia.org/wiki/Hyperinflation

Printing paper money to monetize debts NEVER ends well. Show me a case in which it does, and I'll award you a paper Nobel Prize.

msandford7• 11 years ago

Show me the strictly paper money system which has lived 1000 years (or even 100!) and I'll stop believing that having the ability to debase a currency isn't a train wreck in slow motion. And when I say "strict" I mean it, so paper currencies which used to be convertable to gold or silver or whatever only start counting once convertability stopped.

Nothing in economics short of trivial tautologies can be proved or else economics would be just like physics and we'd understand it all already.

toasted5• 11 years ago

Nobody really knows how this ends, good or bad.

Efficient market theory is based on the fact that when you leave people to their own devices, they tend to do a far better job and be better off than if you try to help them. Basically everyone agrees on that.

So why do we accept efficient market theory for basically everything, yet when it comes to currency someone has decided that we need elaborate schemes of variable government decreed micromanagement in order for things to work?

In terms of keeping things simple and letting the market decide, the perfect currency would be global, unable to be printed or manipulated, of a fixed amount, so that external interference is impossible, and people knew exactly what they were dealing with at all times. The closest we have is gold (and maybe bitcoin).

dimitar• 11 years ago

Deflation according to mainstream economists is undesirable because of a bug in labor markets - "downward nominal wage rigidity".

Since businesses cannot cut salaries (wrecks productivity, due to the morale hit), they hire less or lay off people. And in a depression many enterprises must to one of these things to remain profitable (they cannot increase prices, obviously). This right now has a bigger effect on family incomes than the small gain from lower prices on goods. If productivity is rising rapidly and there is more or less full employment, the opposite case would be true. Inflation is good in such cases, because if wages don't change in dollar terms, whey will be cut in real terms, allowing for more employment.

Debt is part of capitalism, just like steel is used as building material. Talking about debt in moral terms as good, bad or whether there is a right amount (for whom?) isn't productive. Speaking about government debt, right now Eurozone countries have to pay very low interest rates; once they rise too much or full employment is reached, Krugman has said many times that he will advocate restraint.

When conducting monetary policy the Fed buys government securities from the public, not from the Treasury; it pays market prices for it. There is still huge demand for US government bonds (mostly in the USA, thats why "money we owe ourselves". It does remit its profits to the Treasury, but that is a very small percent of the government budget. When the expansion of the Fed balance sheet is so big that it becomes a price setter for government bonds (in dollar terms of course!), then you could say it is printing money to cover deficits. It did that from 1945 to 1951 to pay for WWII and inflation did rise to 25%. So everyone will notice if when the Fed starts "printing money to cover deficits".

m52go6• 11 years ago

Debt is part of capitalism, just like steel is used as building material. Talking about debt in moral terms as good, bad or whether there is a right amount (for whom?) isn't productive.

Of course. If I spoke of debt in absolute terms, I didn't mean to.

Speaking about government debt, right now Eurozone countries have to pay very low interest rates; once they rise too much or full employment is reached, Krugman has said many times that he will advocate restraint.

The problem is Krugman tries to have it both ways. Back in 2012 when borrowing rates were MUCH higher, he STILL criticized austerity.

http://www.nytimes.com/2012/09/28/opinion/krugman-europes-au...

When economies are good, governments should spend more, because, why not? And when economies are bad, governments should spend more, because, it's the only way out. I've never seen him advocate restraint on government spending.

If you can recall evidence to prove that wrong, I'd genuinely love to see it.

There is still huge demand for US government bonds (mostly in the USA, thats why "money we owe ourselves".

Agreed. But this won't last forever. Let's take China for example, one of the largest foreign buyers of our debt. They have to buy large quantities of it because they're pegged to the USD. What happens when they decide to remove that peg? I doubt they'll warn us.

Remember what happened with the Swiss Franc?

sukilot5• 11 years ago

I don't think people agree that stealth wage cuts are good during full employment. Good for the owners of capital, maybe.

orlandob2• 11 years ago

The title of the article is actually: "Nobody Understands Debt". A few years ago I discovered Modern Monetary Theory (thanks Warren Mosler, Bill Mitchell, Randall Wray, Stephanie Kelton) and it really opened my eyes to the universal misunderstanding of national debt. It boils down to this: the household debt model does not apply to governments that issue their own currency (USD, AUD, JPY, etc., but NOT the EUR).

jschwartzi• 11 years ago

Which model applies and can you sum it up in a few sentences? I know it's generally accepted here to make an effort to deeply understand the issues behind the article, but one criticism I have of Krugman's article is that, while he does explain what he thinks Debt isn't, he never bothers to explain why the household model doesn't apply except in a dismissive sort of sense.

So what models apply and why?

orlandob2• 11 years ago

There is one major difference between households and sovereign-currency Governments: households can't create the money they use, but Governments can.

"So you're saying government debt doesn't matter? What about Zimbawe, Argentina, Japan, Pre-WWII Germany?"

First, I'm not saying that Government debt doesn't matter. Like all things, there are limits. What I am saying (and MMT says) is that there are conditions under which increasing national debt make sense - notably high unemployment and underemployment. ONLY the Government can kickstart an economy in this scenario. In those hyperinflation cases, you saw Governments whose debt was denominated by foreign currencies and they tried to print their way to solvency, which of course failed.

sukilot5• 11 years ago

MMT is Kenysianism, with a fresh coat of paint and slightly different policy. (I say this as Keynsian.)

MMT advocates the government directly printing money for stimulus, instead of going through the charade of creating debt and letting banks print money for themselves, and gets a little wacky by hinting that you can print money without inflation.

Fiat currency debt is just printing money. The nation isn't borrowing sheep or wood, the banks just increase some numbers in a digital file ("fractional reserve" banking, where someone else gets to spend money that is in your account at the bank)

nostromo4• 11 years ago

Because debt is money we owe to ourselves, it does not directly make the economy poorer

This rational only works if you're thinking about the economy in collective terms. If the U.S. government borrows money from future taxpayers and gives it to the poor today, yes, collectively it's a wash. But there are winners and losers individually: the lender got an interest payment, the poor person got some free money, and the future tax payer paid more taxes to cover both.

Telling the future tax payer, "hey, don't worry, it was an economic wash since we just owe the debt to ourselves!" would be cold comfort as he or she is clearly poorer due to the increased tax burden.

novalis782• 11 years ago

wonder why this is not pointed out more often

LanceH• 11 years ago

Because the future taxpayer doesn't have a seat at the table.

savanaly• 11 years ago

Remember, money doesn't matter, only goods consumed (which money can facilitate). To help make this clear, imagine if G.O.D. materialized a bag with $10 trillion on the front steps of the white house. Would the world, past, present or future, to be able to consume more?

Thus, it's hard to see how it's possible for the world as a whole to "borrow" from the future in any meaningful sense. How much you tax vs. how much debt you run up does matter, but not in the same way people think.

john_b• 11 years ago

When a country's debt grows faster than its real GDP over a long enough period of time, some sort of fiscal tightening ("austerity") will become necessary to avoid default. This may take the form of reduced spending, increased taxes, or both.

Guess who will be paying for that? Future consumers and taxpayers.

Not all debt leads to this. Debt which is incurred responsibly and paid off in a timely fashion promotes growth. But there are examples (Greece is one) where debt is used by those in power to sustain their own power structure rather than dealing with economic problems under their watch. To the extent that economic changes negatively affect the ruling elite, those in power will avoid making those changes. If those changes happen to be necessary to preserve future economic stability, then it will be future generations who pay for it.

crazy1van4• 11 years ago

Perhaps Krugman would like to redefine debt, because his definition does not seem to match Merriam Webster [0]:

"an amount of money that you owe to a person, bank, company, etc. the state of owing money to someone or something"

Debt is a wonderful thing. It means you can buy an expensive good like a house or a car now and pay for it later. As opposed to saving for years and then getting the car. However, either way you pay. I fail to see how national debt is any different. Governments want money now, so they go into debt often by selling bonds.

If the debt was acquired during my generation, but the bill comes due during the next generation, then that seems to be pretty close to stealing from the next generation. Today's debt is tomorrow's taxation.

[0] http://www.merriam-webster.com/dictionary/debt

binarytrees2• 11 years ago

If a country uses that debt to let's say, invest in DARPANET, or build new transit infrastructure for commerce. I'd say that is a good use of debt. I think comparing what a government can use debt for vs buying a car or a house is short sighted.

twblalock• 11 years ago

National debt is different from household debt for many reasons, including the fact that the government operates a central bank, prints its own currency, does not have to apply for credit, passes the laws that specify the terms of the debt it owes, etc. Plus, in the case of the United States, the national debt is in the form of one of the safest and most widely held investment vehicles in the world : US treasury debt.

To argue that government debt is the not any different from household debt is to ignore all of those things.

crazy1van4• 11 years ago

The mechanics are different but the fundamental idea is the same. Taking on debt today is a promise to pay back the money in the future. Governments have more ways of violating or manipulating that promise, but the core idea is the same.

Taking your points one at a time:

the government operates a central bank, prints its own currency

This is one method governments use to skirt paying the full value of what they owe. They can borrow a fixed number of dollars today, then print money and use the printed money to pay what they owe. By doing so they are paying back the dollars they owe, but because each dollar is worth less, they are never paying back the value they owe. And they will pay the price with a higher interest rate next time.

does not have to apply for credit

Applying for credit for normal people is a way of offering evidence that you're likely to pay back what people loan you. The more trustworthy you seem, the less risk for the lender, and therefore the less demanded interest. Governments are the same way. The more the perceived chance that a government will not make good on its debts, the greater the interest it must pay to borrow money.

passes the laws that specify the terms of the debt it owes

This is another method of skirting paying back what they government has borrowed. Drastic changes or changes which modify the rules on existing debt will have an effect on the government to borrow more money in the future.

in the case of the United States, the national debt is in the form of one of the safest and most widely held investment vehicles in the world

Yes, but I think that is true because the US usually doesn't play the games that are in the earlier points. Traditionally, the US has not drastically increased its money supply and has not changed the law on existing debt. If they started doing these tricks more, I think we'll see the high regard fade for US treasuries.

One last point: these are methods governments use to avoid repaying debt, but individuals in most countries have their own methods. They can default on a loan or declare bankruptcy entirely. But just like governments, that will make it harder to borrow in the future. The mechanics are different but the core ideas are the same.

hnnewguy13• 11 years ago

It means you can buy an expensive good like a house or a car now and pay for it later. As opposed to saving for years and then getting the car.

What about debt to build businesses or infrastructure that creates real wealth?

crazy1van4• 11 years ago

Debt is a fantastic tool for all kinds of good things from buying cars to seed money for businesses. But in both cases, the person/entity who loaned out the money is expecting to get paid back eventually.

shit_parade2• 11 years ago

Another way to think about debt is that central banks are currently purchasing more global sovereign debt than is being issued[1] resulting in negative yields for many bonds. It is hard to fully articulate how perverse this is, but governments are issuing debts and then purchasing them through their supposedly independent central banks and these central banks are paying these governments for the honor of buying their debt -- world governments are paying themselves to take on debts, someone please tell me how anything resembling a market and price realization can occur under these circumstances, this is essentially central planning and is resulting in gross misallocation of wealth throughout the entire developed world.

[1] http://www.zerohedge.com/news/2015-02-09/stunning-chart-day-...

jhulla5• 11 years ago

Misallocation of wealth is only a problem if it isn't "misallocated" to you.

My question is this: how does this edifice collapse?

Matumio• 11 years ago

Hm. I thought the largest part of our money is actually debt money created by private banks when they are granting credit. In order to create the money to pay interest on that credit, it is necessary that somebody makes more debt elsewhere. Which is an absurd system to start with.

marcusgarvey• 11 years ago

It's amazing. We answered a crisis brought on by too much debt with -- more debt. And instead of investing it in things that would have a real benefit to larger swathes of society (say, infrastructure, education, an even less byzantine and more affordable health system than Obamacare) it seems only to have goosed asset prices and promoted malinvestment. I believe politicians are to blame: they are forcing central banks to try and stimulate the economy in unhealthy ways because they are too cowardly or stupid to promote stimulus programs that might have a chance of boosting real demand.

binarytrees2• 11 years ago

Debt to build new transit infrastructure, research and development labs etc is a great way a country can use debt to benefit it's current and future citizens. A person could take a loan out for a car and that may create a small fraction of jobs. Where as if a government can take on debt to create DARPANET or invest in clean energy the outcome is many times more profitable to the government and future business derived from that.

toasted5• 11 years ago

Unless the investments bomb and no value is created eg. the clean energy investments of the last 10 years

Fuzzwah• 11 years ago

Depends what you value.

I personally value a planet where my kids can enjoy a clean environment.

vijayboyapati• 11 years ago

There are two major problems with this article (although they're not specific to this article and are more generally applicable to Keynesian economics).

Firstly Prof. Krugman writes: "Why is deleveraging a problem? Because my spending is your income, and your spending is my income, so if everyone slashes spending at the same time, incomes go down around the world."

This model entirely ignores capital theory. It creates a simple closed system where if spending goes up, everyone is better off, and if spending goes down, everyone is worse off (because they have less income). But this has almost no relation to whether more or less wealth is being created. Are there more cars, iphones, loaves of bread, new medical technologies? It is the creation of new capital that makes everyone better off, and increases the standard of living, not more spending (although more spending often follows the creation of new goods)

Secondly Prof Krugman writes:

"You can see that misunderstanding at work every time someone rails against deficits with slogans like “Stop stealing from our kids.” It sounds right, if you don’t think about it: Families who run up debts make themselves poorer, so isn’t that true when we look at overall national debt?

No, it isn’t. An indebted family owes money to other people; the world economy as a whole owes money to itself. And while it’s true that countries can borrow from other countries, America has actually been borrowing less from abroad since 2008 than it did before, and Europe is a net lender to the rest of the world.

Because debt is money we owe to ourselves, it does not directly make the economy poorer (and paying it off doesn’t make us richer)"

The problem isn't who the debt is owed to, the problem is whether the debt is serviceable or not and is used to create new wealth. This all gets confused by the introduction of money into the discussion. But imagine a situation where person A loans person B a shovel with the understanding they will receive the shovel back in a week, along with 10 potatoes. This is a loan that is likely to be serviceable. Now instead imagine a loan where person A loans person B a shovel with the understanding that person B will return the shovel along with some produce. Now instead of digging up vegetables, person B uses his shovel to excavate some rocks on his property to create a nice looking rock garden. Person B is now going to get into trouble paying back his loan. The debt he has incurred has been used to work on a project that is unlikely to be profitable. This is akin to people going into debt during the housing bubble to fund their consumption (big house, fast cars, big TV etc) rather than fund more production. That is the kind of debt that is not going to be serviceable and will eventually need to be written down, or in the case of the US, handed over to the taxpayer.

We ARE better off writing down that debt because, in general, we want people to use debt to work on projects that generate new wealth and capital over time, and if we do not write that debt down, people will continue to work on unproductive, unprofitable projects.

j_baker2• 11 years ago

Krugman's right about one thing: economies that have had large austerity pushes seem to have done worse than countries that have had smaller spending cuts. I don't know that I would agree with Krugman about how much spending needs to happen to recover. Within the next 20 years, spending on Medicare and Social Security are expected to grow rapidly. Thus, I think frugality still makes sense.

sakri• 11 years ago

I would be very sad to see the death of the monetary union.

Understanding Debt

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